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Research Focus
Financing New Urbanism Projects: Obstacles and Solutions
An analysis of survey results of interviews with twenty-three industry practitioners from the development and finance fields yields a number of important results regarding the financing of New Urbanist projects. First, these projects are perceived as more risky than the typical real estate project. The mixed use nature of the projects provides the foundation for that perception. Development of mixed uses is viewed as inherently more difficult to evaluate and to do well in practice. There is an added risk premium attached to mixed use projects that are New Urbanist in nature, but the perceived risk can vary substantially by the type of project. For urban in-fill projects where there is little doubt about the willingness to accept higher densities, the additional perceived risk of New Urbanism is low. For suburban projects where there is no consensus about the desire for greater density, the added risk premium is much larger. The investor and lender community is most hostile to greenfield, New Urbanist developments. Many believe the up-front infrastructure costs are so high and the difficulty of making retail work in such environments are so problematic that they will not finance such deals. The relatively high perceived risk for most New Urbanist projects imposes relatively high required rates of return on them. This, in turn, requires the projects to generate cash flows quickly in order for them to be financially attractive to investors. Financiers consequently favor larger, more experienced developers for mixed use projects in general and New Urbanist ones in particular, as careful phasing of development is necessary on larger projects especially. This implies that smaller New Urbanist developers should focus on smaller, less complex projects with a dominant property type.
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